Jackson Hole May Disappoint Investors Primed for Stimulus
Federal Reserve Chairman Ben S. Bernanke -- returning this week to the scene of a 2010 speech that foreshadowed a second round of quantitative easing -- probably will disappoint investors looking for him to signal new stimulus.
Bernanke probably won’t use his Aug. 31 speech at the Fed’s annual symposium in Jackson Hole, Wyoming, to suggest a third round of bond buying is at hand, according to economists including Michael Feroli and James O’Sullivan. Members of the Federal Open Market Committee -- who meet next on Sept. 12-13 -- are closely monitoring unemployment and other data and have been divided about whether to spur expansion. The U.S. economy also remains beholden to political decisions made in Washington and in Europe, which is struggling to contain its debt crisis.
“I don’t think Bernanke wants to make Jackson Hole into a policy-signaling event,” preferring to “reserve that for the FOMC meetings,” said Feroli, chief U.S. economist at JPMorgan Chase & Co. (JPM) in New York.
Two years ago, Bernanke said in his speech that the FOMC “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
The committee didn’t announce a second round of quantitative easing at its September meeting, though; it waited instead until November 3 of that year.
“The Fed chairman’s Jackson Hole address has traditionally been used more for laying out broad themes than for sending specific policy signals,” said O’Sullivan, chief U.S. economist for Valhalla, New York-based High Frequency Economics, in an Aug. 27 report.
Markets rallied in the weeks after Bernanke’s 2010 remarks; “on the day, however, the speech was generally read as inconclusive,” O’Sullivan said. “Nor do we expect Mr. Bernanke to send a definitive signal this year.”
Speculation that central banks will do more to bolster growth has helped drive up stocks and commodities, with the Standard & Poor’s 500 Index rallying 10 percent since June 1, and gold rising to $1,670.60 an ounce on Aug. 23, the highest since April. Crude oil climbed to $97.26 a barrel on August 22, the most in four months, and gasoline in the U.S. hit $3.73 a gallon last week, the highest since May.
“You can’t find a trader who doesn’t think Ben Bernanke is going to signal QE3 at Jackson Hole,” said Dan Greenhaus, chief global strategist for broker dealer BTIG LLC in New York. “But to have traders so convinced that this is a sure thing kind of screams there’s room for a letdown here.”
Policy makers at the central bank have said they are prepared to provide new stimulus “fairly soon” unless they’re convinced the economy is poised to rebound, according to the minutes of the FOMC’s July 31-Aug. 1 meeting released last week. Bernanke sees “scope for further action,” he wrote in an Aug. 22 letter to California Republican Darrell Issa, chairman of the House Oversight and Government Reform Committee.
While Eric Rosengren, president of the Federal Reserve Bank of Boston, and Charles Evans, head of the Chicago Fed, have called for additional stimulus since the last FOMC meeting, St. Louis Fed President James Bullard “wouldn’t do it right now,” he said in an Aug. 23 CNBC interview. “If it was just me and we just have the data up until today, I wouldn’t take a decision,” he said, adding that “the minutes are a bit stale” since they’re from almost a month ago.
The pace of job creation rose to 163,000 in July, more than double the 73,000 monthly average in April-June, the Labor Department said Aug. 3, and U.S. house prices jumped a seasonally adjusted 1.8 percent in the second quarter from the previous three months, the most since the fourth quarter of 2005, the Federal Housing Finance Agency reported Aug. 23.
Bullard’s caution was echoed by Atlanta Fed President Dennis Lockhart, who said in a speech before the minutes were released that U.S. policy makers face a risk of easing too much as they try to spur the “disappointing” three-year-old economic expansion.
Even as payrolls improved in July, unemployment rose to 8.3 percent, the 42nd consecutive month the rate has remained above 8 percent, and gross domestic product grew at a 1.5 percent annual rate in the second quarter, compared with 2 percent in the first quarter and 4.1 percent in October-December.
Given the division among policy makers and mixed economic data, Eric Green, a former economist at the New York Fed, said Bernanke will want to use the symposium to clarify his views.
The minutes from the last FOMC meeting “make Jackson Hole even more relevant because it will help resolve the tension between the Aug. 1 period, which preceded firmer data, and how the Fed is looking at things now,” said Green, now global head of rates and foreign-exchange research at TD Securities Inc. in New York.
“The burden of proof is to see a sustained pickup in growth, and I don’t think we’re going to get that,” he said, predicting expansion in the third quarter will come in below 2 percent again. “The world will be looking for something very clear, and the odds are that he will deliver.”
Dean Maki, chief U.S. economist for Barclays in New York, disagrees.
“It would be odd” for Bernanke to “take a strong position in advance of receiving the August jobs numbers a week later,” said Maki, who will be attending the symposium.
He predicts a 150,000 increase in employment when the Labor Department unveils its next report on Sept. 7. That might be strong enough for the Fed to hold off on new asset purchases, he said. “We’re not looking for QE3 in September or beyond because we do expect stronger data in the second half of the year.”
Bernanke isn’t alone in considering fresh aid for his economy. Joachim Fels, Morgan Stanley’s London-based chief economist, predicts central banks in the U.K., euro area, Sweden and Australia will ease monetary policy further, as will those in about 10 emerging markets, including China and Brazil.
Mario Draghi, in his first year as president of the European Central Bank, will participate in a Jackson Hole panel on Sept. 1, five days before he chairs a meeting of his Governing Council at which investors seek details of a plan to defend the euro region from surging bond yields.
Draghi’s Aug. 2 pledge to craft the plan and declaration that the euro is “irreversible” were enough to drive a rally in Spanish and Italian bonds as investors bet the central bank will be able to quell the region’s debt crisis, now in its third year. The yield on 10-year Spanish government bonds fell to 6.42 percent on August 24 from a peak of 7.62 percent on July 24. Ten-year Italian bond yields were 5.71 percent compared with 6.6 percent in July.
Having already cut the ECB’s main refinancing rate to a record low of 0.75 percent in July, Draghi said Aug. 2 it’s “unacceptable” for investors to bet against the euro’s future by elevating bond yields, and such trading should be “addressed in a fundamental manner.”
That may mean the ECB buys short-term maturity bonds in the secondary market, although only if Europe’s rescue fund buys directly from governments and countries that agree to strict conditions on austerity and economic reform, he said.
While Der Spiegel magazine this month reported the ECB is considering yield caps, economists at Goldman Sachs Group Inc. predict it will eschew explicit goals and instead intervene to keep market rates within a wide range.
Draghi might wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12 before unveiling full details of his plan, two central bank officials said last week.
“What Europe does is far more important than what the Fed does,” said John Ryding, chief economist and co-founder of RDQ Economics in New York, who will be in Jackson Hole. “There’s been a reprieve in bond markets, but it’s a reprieve based on the expectation of action.”
Even so, Bernanke’s speech will be closely followed as he gets another opportunity to say whether the U.S. economy’s problems “are susceptible to monetary-policy moves,” said Jerry Webman, chief economist for OppenheimerFunds Inc. in New York with $178.8 billion in assets under management.
“I’m pretty skeptical” more stimulus will help, “but I figure he knows more about this than I do,” Webman said.
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